Friday, July 02, 2010

Osborne's Bullingdon Budget

Prepare for a hot autumn, comrades: the class war starts here. Labour have hoist the red flag over Westminster and are preparing bonfires for the Liberal Democrat “collaborators”. This budget, they say, was Bullingdon Man taking his “ideological” retribution against the state using the coalition as cover. It will hit people on low and middle incomes hardest, throw hundreds of thousands out of work, create fear and insecurity among benefits claimants and the disabled. But the question is: was there any alternative, given Britain’s wrecked finances? Or was this, as the Chancellor put it, the “unavoidable budget”?

It is certainly a radical, even a revolutionary budget. A 25% real terms cut in non-protected government departments in four years. A fiscal consolidation of nearly £120bn by 2015. The rollback of the state implied by this Budget is simply unprecedented in modern British history. We are talking tens of thousands of public sector jobs going, services like education, housing, transport, police and social work slashed. Margaret Thatcher never tried anything so ambitious. George Osborne said he was seeking a deficit reduction on the ratio of 80% spending cuts to 20% tax increases. She only managed about a fifty fifty split in her early budgets, and public spending actually went up during he 1980s. Can he be serious?

In the end. to appease his coalition partners, Osborne settled for 77% spending cuts - making the Liberal Democrats the three percenters of British politics. The one significant tax the Chancellor did increase, VAT, was increased to 20% in a move that will hit the lowest income families hardest. Then there is the first serious welfare reform in a generation - the unthinkable finally thought. Lone parents out to work the moment their child hits school age. Child benefit frozen for three years - which implies, with inflation, a cut in real terms of up to 4% a year. All benefits linked to CPI rather than RPI inflation. Housing benefits capped at £400. Public sector wages over £21,000 frozen for two years.

George Osborne claimed that this was a “progressive" budget, at which Nick Clegg and treasury secretary, Danny Alexander, nodded like the dog in the Churchill advert. If so, it is a novel definition of the word. We may all be in this together, but some of us appear to be more in it than others. The Chancellor bottled the Capital Gains Tax issue, raising it only to 28% for higher rate tax payers - so much for tax equality between income and capital gains. The bank levy of £2bn will not fluster a financial services industry that has benefited from hundreds of billions of state support. Corporation tax is to be cut progressively over the next four years - 24% - but it will be shareholders who most directly benefit. There were a number of bungs to small businessmen, including extending the lifetime CGT shelter from £2m to £5m when they sell up.

The people who depend most on public services are, of course, those in low incomes and those living in places like Scotland, where public spending is highest. A quarter of Scottish workers are employed by the state and up to half of all private sector jobs depend on public spending in one way or another. Yes, the whisky industry will be pleased at the freeze on duties, but there is precious little else to cause good cheer in Scotland. No tax breaks for Dundee’s video games industry. A white paper on tackling regional economic differences will be published this summer suggesting that the debate about Calman, Barnett and regional taxation may be coming to some sort of conclusion in time for the next Scottish elections - elections that promise to be a blood bath for the Scottish Liberal Democrats.

What did the Libdems get out of this austerity budget, apart from being the Chancellor’s ‘donut’ in the television coverage of the speech? Dianne Abbot, the Labour leadership candidates aid that “the Liberal Democrats bottled it - all they got was cheaper cider”. Libdems insist that they got major concessions protecting the most vulnerable in society - £2bn to help the poorest families through a £150 bump in the child tax credit. A guarantee that pensions will rise from 2011 by inflation or earnings whichever is the the highest. And, of course they got the first step in the road to lifting those earning less than £10,000 out of income tax altogether. The personal allowance was raised by £1,000 to £7,475 taking 900,000 out of tax altogether.

Will this be enough to calm the Liberal Democrat backbenchers? Will it stop their local councillors being fed to the lions when the cuts hit services this autumn? Will the Scottish Liberal Democrats, a fifth of their MPs are Scottish, go along with Osborne’s “butchery”? Labour doesn’t think so. The former Labour Scottish Secretary Jim Murphy said it was an old-fashioned “ideological” Tory budget and it was “shameful” that the Liberal Democrats were lending their names to it. During the general election campaign the Liberal Democrats said that VAT was “secret Tory tax bombshell”. Well, times change says Vince Cable, the business minister “we never ruled it out”. Perhaps not, but it certainly sounded that way. Will ordinary Liberal Democrats be happy with such an all out assault on the state? I very much doubt it.

The broader question, thought is whether the threat of a sovereign debt crisis, like Greece of Spain, made these unprecedented measures necessary. Public sector net debt is currently 68% of GDP and arguably it could not be allowed to rise further without the risk of pushing up interest rates and interest payments. Many economic authorities like the IMF, agree that cutting spending is more likely to promote growth than raising taxes. Other economists disagree, of course, and argue that cutting the state on this scale now is likely to plunge the economy into a double dip recession. This budget will inevitably lead to lower growth next year, and to higher unemployment - even George Osborne admits that much. Cable insists that the impact on growth and jobs would have been far worse had government debt been allowed to grow unchecked.

What no one can deny is that this is - in the short term at least - a highly deflationary budget. It is a colossal gamble, both with the coalition and with the nation’s finances. When the actual departmental cuts are announced in the spending review in September, the public reaction could be fierce. George Osborne would not dare echo the former Tory Chancellor Norman Lamont’s remark in 1991 that unemployment was “a price worth paying” for economic stability. But he appears to believe it nevertheless.

About Me

Iain Macwhirter is the award-winning political columnist for the Herald and Sunday Herald. He has been a political broadcaster for over 20 years, in Westminster and Holyrood, and is former Rector of Edinburgh University.